How To Get An Infinite Return On Property? (Ep226)

Hello I’m Ryan and this is onproperty. Yeah
Hi5 You hear investors talking about how they
got an infinite return on investment. Today I’m going to talk about how you can get an
infinite return on property investment. Hey I’m Ryan from onproperty.com.au your daily
dose of property education and inspiration. What is an infinite return and how can we
get it. Today I’m answering your question, and today’s question comes from Daniel. He
says, “I recently watched a YouTube video from Robert Kiyosaki from Rich Dad Poor Dad
called “Infinite Return” it leaves a lot of info out such as gross rental income, what
kind of loan interest only or other. Can you comment on this strategy of real estate investing
and whether you think they ever intend to pay off this property or not. Would they have
the option of replicating the strategy on another project and using the dividends from
that to pay off the original project? Based on Ken McElroy’s book he doesn’t put his own
money into the deals instead uses investors. How then does he make his money? Is it by
taking on the management of the property or commission or by part ownership? Is the interest
rate on the deals like this typically higher than a home loan and how much do you think
they typically pay? Not sure if you can answer these questions since a lot of figures have
been left out but your input would be appreciated.” Then he left the link to the video below,
which I will put on the blog for this video which will be episode 226. So you go to onproperty.com.au/226.
You can see that Robert Kiyosaki video there and you can see the full transcription and
everything over there as well. Alright Daniel let’s first explain what I
think Robert Kiyosaki means when he says an infinite return on investment because really
I don’t think in this world there is such a thing in what I think we’re thinking about
in terms of infinite return in terms of gaining infinite amounts of money. That’s not what
Robert’s talking about. He’s not talking about infinite amounts of money and being infinitely
rich, what he’s talking about is the fact that if you put zero dollars into a deal and
all you use is other people’s money effectively your cash on cash return will be infinite.
The reason this happens is in order to generate a cash on cash return what we do is we get
the annual income or the annual profit that is derived from an investment and we divide
that by the amount of money that we put into the investment. so let’s say we get a $1,000
back from the investment and we’ve invested $20,000 into it. What we would do is 1,000
divided by 20,000 which is going to give us 0.05 of 5%. However if you haven’t invested
any of your own money into a property and it’s generating $1,000 what you’re going to
do is take $1,000 and divide it by 0. Now in mathematics anything divided by 0 actually
equals infinity and so this is how we the idea of n infinite return.
A really simple example of an infinite return is when you take an equity loan from another
property you have, maybe your principal place of residence or an investment property. So
you get an equity loan and you draw out that equity which is effectively creating another
loan so you’re borrowing that money from the bank, use that equity as a deposit on the
new property and you get a loan for the remainder of that property. Effectively you haven’t
gone into your bank account and shelled out any money, you haven’t had to go to work in
order to generate a certain amount of money and save that to buy that property. You borrowed
money from the bank using your house’s security and you borrowed the rest using the new property
as security. So effectively you have $0 invested in the deal. This would be an example of an
infinite return deal if you didn’t then put any other money into the property for example
if it was negatively geared. So this is what he’s talking about when it
comes to infinite return. So the way to achieve an infinite return would really be to use
other people’s money and that would either be through the banks like getting an equity
loan or getting 100% loan which is really only available with guarantor loans so you
could do that or you could invest in other people and they put up the money and you put
up the knowledge and expertise or the sweat equity. Talking about Ken McElroy and the
way that he does property from my knowledge is that he actually gains a stake in the properties
that he invests in. He uses sweat equity and his expertise in order to generate deals,
so he would go and investigate a property, do all the due diligence, make an offer, get
it accepted and then he would go out to different investors and he will source funding for that
property. Now I wrote in an email to Daniel I don’t
know exactly how he structures things and how much ownership he gets and if 100% is
the way he does it but this is what I’m assuming. He would get, let’s say he gets 10 investors
and that each invests 10% of the price of that property. They might invest 10% but only
get a 9% share in the ownership of that property and so what that does is leave 10% left over
for Ken at the end of the day. Now these investors probably aren’t too considered about losing
that 1% cause what they’re focused on is the return on investment on their money rather
than their percentage ownership in a property. They don’t care if they own 100% of the property
that’s a dud or 9% of the property if it’s going to be a killer; what they want to know
is how much cash are they investing and what returns they’re going to get for the cash
that they’re investing and so he may also make money on commissions and fees for managing
the property as well that could be something on the side. I do think he would take ownership
in it. From what I would imagine that would be where the big bucks were.
When talking about interest rates on deals and stuff like that, getting an equity loan
and then using that to purchase property is very common in Australia, so it’s highly unlikely
that you are going to see inflated interest rates in that example if you go and purchase
property owner finance which is another way to potentially get an infinite return because
owner finance sometimes can be more flexible and you can avoid putting down a deposit.
If you can avoid that deposit owner finance deals tend to have higher interest rates that
come with them. So I think that answers all of your questions
Daniel and really covers the concept of an infinite return. It’s not infinite in the
fact that its making infinite amount of money and they haven’t covered the gross rental
yield is and that sort of stuff cause it doesn’t matter. If you make $1 on a property you’ve
invested nothing into it that’s an infinite return. If you make $10,000,000 on a property
and you’ve invested nothing into it, it’s an infinite return as well. So using the term
infinite return doesn’t actually tell you whether something is a good investment and
worth your time or not because if you’ve invested a year of your life and the property makes
$1 even if you’ve invested no money of your own into it, is it really worth all that work
for a dollar. Well probably not, even though you got an infinite return and it sounds great
it doesn’t necessarily mean its a great investment in terms of the time you’ve put into it.
So infinite return is something that we can say because it’s fun to talk about, it’s fun
to talk about playing with someone else’s money and getting a return on an investment
with someone else’s money and never having to have money ourselves. But it’s not a real
indicator whether or not you should invest in a property or whether or not that particular
investment strategy is going to work. Alright so I hope that’s been helpful and
if anyone else out there have any other questions please email me [email protected] or
got to onproperty.com.au/contact and you can fill in the form there. If you want my free
list of 10 real positive cash flow properties so you can see that they do exist, they are
real, these are properties in Australia not in another country go to onproperty.com.au/free
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So until tomorrow remember to stay positive.